solid foundation is built to support a
permanent dwelling. On any particular
area, you dig until you are satisfied you
have firmness under foot.”

There is no formula to determine
how much time and resources should be
allocated to due diligence. The answer
will depend on the portfolio—whether
it’s big or small, the type of assets
involved and the resources available.

Varrichio believes there is no such
thing as too much due diligence. “There
should be as much due diligence as
possible performed to appropriately
assess the risk and the potential upside,”
he said.

Taulbee agreed, adding, “The more
you know, the better.”

Freeland warned that buyers should
not take the information sellers provide
at face value.

“If it were important for you to know
about the educational qualifications of
top management, for example, it is not
enough for any of them to state that
they went to college or to answer ‘yes’
to such a question on your due diligence
survey or have a diploma on the wall,”
she said. “If it is important, you’ll find
out what college, the year of graduation
and major. Then you’ll call the college
to confirm it all.”

Economic Impact

Recent economic changes have
created a need for even higher due
diligence standards.

Taulbee believes buyers are now
using more in-depth scoring and
validation models to determine what an
asset is worth.

“In the past, asset valuation was not

as sophisticated or comprehensive, but
now it is too risky not to undertake
a more robust valuation approach,”
Taulbee said.

Liquidation models may also have
to be reassessed to align with current
economic times. According to Varrichio,
many of the portfolios being worked
today had due diligence performed on
them several months and possibly years
ago and the past liquidation models
were based on historical data gathered in
better economic times. As a result, most
portfolios are underperforming the due
diligence liquidation models.

“If this is not recognized, then
due diligence models will continue to
overestimate returns and your bids will
likely be too high,” Varrichio said.

“Twelve years ago, when we first
started, we knew less about the business
and performed less due diligence
and were securing more profitable
transactions,” Varrichio said. “Today’s
market is highly competitive and much
more complex.”

Freeland added, “Whatever you
do in the area of due diligence when
buying or selling debt, consider that
the industry as a whole is best served
when we all remember that respect and
professionalism serve us well. Fairness
and integrity can be standards that
define us all.” cm

The recently updated Due Diligence
Guidelines is only one of many products
and resources ACA International’s
Asset Buyers Division offers asset
buyers. They are available to purchase
from ACA’s Online Store under the
Asset Buyers Section. Visit http://www.
acainternational.org/store for details.